Hain Celestial Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014; fiscal 2015 second quarter. Amounts below are in U.S. dollars.
Business context
Hain manufactures and sells organic and natural food and personal-care products. Its operations include the United States, United Kingdom, HPPC, Canada and Europe. The company acquired the remaining 51.3% of Hain Pure Protein Corporation (HPPC) on July 17, 2014, making it wholly owned; the results are reported as a separate segment. Results also include the Tilda and Rudi’s acquisitions. A two-for-one stock split took effect December 29, 2014; comparative share and per-share data were retrospectively adjusted.
Financial performance
| Metric | Quarter ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Net sales | $696.4 million; up 30.2% | $1,327.6 million; up 31.1% |
| Gross profit / margin | $167.3 million / 24.0% | $293.2 million / 22.1% |
| Operating income / margin | $74.0 million / 10.6% | $102.8 million / 7.7% |
| Net income | $44.6 million, versus $41.2 million | $63.4 million, versus $68.9 million |
| Diluted EPS | $0.43, versus $0.42 | $0.62, versus $0.70 |
| Operating cash flow | Not presented for the quarter | $54.3 million, versus $73.5 million |
| Operating free cash flow | Not presented for the quarter | $28.5 million, versus $52.7 million |
At December 31, cash was $135.2 million, total debt was $875.2 million, and working capital was $476.0 million. Total debt comprised $150.0 million of senior notes, $633.2 million drawn on the revolving facility, and other borrowings. The company reported total assets of $3.0 billion and stockholders’ equity of $1.62 billion.
Changes versus prior comparable periods
- Acquisitions contributed $153.3 million of second-quarter sales and $284.8 million of six-month sales; therefore, reported growth includes substantial acquired revenue.
- Quarterly gross margin fell 2.7 percentage points and operating margin fell 1.4 points year over year. Six-month gross margin declined 3.8 points and operating margin declined 2.6 points.
- Six-month operating income decreased 1.2%, while net income fell 7.9% and diluted EPS fell from $0.70 to $0.62. Second-quarter net income rose, partly reflecting comparison with a prior-year discontinued-operations gain.
- Six-month operating cash flow declined $19.2 million; higher working-capital needs, including receivables and inventory, and recall effects weighed on cash generation.
- Foreign-currency translation reduced accumulated other comprehensive income by $110.0 million in the six months. The company said stronger U.S. dollar translation adversely affected international results and cash flows.
Outlook, risks and unusual items
- Recall: The voluntary nut-butter recall generated $30.1 million of pretax charges in the six months, including product returns, inventory and other cost-of-sales charges, and consumer refunds and administration. The company is pursuing insurance recovery and continuing to work with the FDA; further fiscal 2015 transportation and storage costs were expected but not anticipated to be material.
- Operations: A fire at Tilda’s milling facility required temporary use of co-packers and affected product availability. The company said it was insured for related costs and expected part of the facility to be functional by fiscal year-end. UK chilled-dessert factory start-up costs were $5.9 million for the six months.
- Costs and currency: Management cited higher input costs, volatile commodity prices, foreign-exchange exposure and global economic and political uncertainty. It described productivity, sourcing, cost savings and price increases as mitigation measures.
- Capital and liquidity: Management expected fiscal 2015 capital spending of approximately $45 million and said cash, operating cash flows and credit availability should cover ordinary needs and expected requirements for at least 12 months. The $1.0 billion unsecured revolver expires in December 2019; $633.2 million was drawn at period-end. Covenants include minimum interest coverage of 4.0:1 and maximum leverage of 3.5:1, with a specified acquisition-related step-up.
- Other exposures: A California product-labeling class action was certified in November 2014 and remained in discovery; the company said it would defend the case and considered the claims without merit. The company also highlighted goodwill and trademark valuation sensitivity, especially the New Covent Garden Soup trademark, whose estimated fair value approximated carrying value.
The filing does not provide a clear numerical fiscal 2015 sales or EPS outlook in the supplied text. It notes that results are seasonal and that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- How much of future sales and earnings growth is organic versus attributable to HPPC, Tilda and Rudi’s, and how acquired businesses perform after integration.
- The final cost of the nut-butter recall, insurance recoveries, FDA resolution and any continuing effects on sales, margins or customer demand.
- Whether gross-margin pressure from recalls, product mix, start-up costs and input prices eases, and whether productivity and pricing offset those pressures.
- Working-capital conversion and operating cash flow, including inventory and receivables needs, alongside planned capital expenditures.
- Debt levels, facility utilization and compliance with credit-agreement covenants, particularly as foreign exchange and acquisition effects continue.
- Progress restoring Tilda milling operations, the effects of currency movements, and potential impairment risk for sensitive goodwill and trademark valuations.